coke vs pepsi 092506

Coke vs. Pepsi

By: Brad Pearce, Les Pierce, Mike Puleo, Aaron Martinez, Lee Ann Whaley

Case Background: Coke

• 2000 Annual Sales– 20.5 Billion

• 2005 Annual Sales– 23.1 Billion

• Mistakes Made by Management– Former CEO Doug Investor

• Raised price of syrup by 7.7%– Upset bottlers who in turn raised the price of Coke

• First time in years

• Decreased overall volume and net income by 41% in two years

• Pushed heavily on carbonated drinks instead of sports drinks

Case Background: Coke

• New CEO– Douglas Daft, replaced Investor in 2000

• Non-carbonated drinks new focus

• Analysts believed the change in management would improve distributor relations– Bring back Coke to former glory

Case Background: Coke

• Profitability Ratios

• Growth Ratios

Company Background: PEPSICO, INC.

• $20 billion company in 2000

• Snack-food, Frito-Lay trademark– 2/3 of Sales & Operating Income from snacks

• Soft-drink, manufactured concentrates

• Noncarbonated beverages, Juices– 1/3 of Sales & Operating Income from beverages

Company Background: CEO

• Roger Enrico, CEO from 1996 to 2000• 1997 - Instituted a massive overhaul at PepsiCo

– Sold KFC, Taco Bell, and Pizza Hut

– ( ridding PepsiCo of poor return performing divisions)

• 1999 – Spun off bottling operations To an independent public

company.

Company Background: The New PepsiCo

• PepsiCo left with higher-margin business of selling concentrate to bottlers

• Bottlers can now raise their own capital– Freeing up cash within the parent company

• Enrico brokered the acquisitions of:– Tropicana, market leader in orange juice– Quaker Oats, Gatorade energy-drink market

• Enrico, doubled ROE from– 17% in 1996 to 30% in 2000

Industry Overview

• Beverage Industry transformed between 1996 – 2000.

• The non-carbonated drink market grown over 62% during that time frame.

• Soft drink Market fell from 71.3% to 60.5%.

Marketing Campaign forSoft Drinks

• 1996 – 2000 Pepsi had aggressive and exciting campaigns

• In stores Pepsi wanted Frito Lays and Pepsi products side by side

• Summer of 2000, coke launched a failed advertising campaign

Is it Coke or PepsiCo?

• Tropicana?

• Dasani?

• Nestea?

• Gatorade?

• Starbucks Frappuccino?

Market Share Battle

• Coke – 35.7%

• Minute Maid – 16.9%

• Dasani – 11.8%

• Nestea – 9.5%

• Powerade – 14.7%

• Frozen Drink – 0%

• Pepsi – 34.7

• Tropicana – 44.7%

• Aquafina – 14.9%

• Lipton – 21.7%

• Gatorade – 84.7%

• Starbucks Frappuccino – 85%

Q. What is EVA?

• Focuses on managerial effectiveness in a given year.

• A firm adds value when its ROIC is greater than its WACC.

• If WACC exceeds ROIC, then new investments in operating capital will reduce firm’s value.

• Estimate of a business’s true economic profit for the year.

• Represents residual income that remains after cost of capital has been deducted.

• Measures the extent firm has increased shareholder value.

Economic Value Added (EVA)

Weighted Average Cost of Capital (WACC)

Q. What is WACC?

• The current weighted average cost a company faces for new or marginal dollar of capital.

• It is not the average cost of dollars raised in the past.

• Percentages of each capital component should be based on management's target capital structure.

• Weights used in estimating the WACC should be based on market values, not book values.

• Weights used in calculating WACC should also be based on expected future weights, which are the firm's target weights.

Net Operating Profit after Taxes (NOPAT)

2001 2002 2003

Operating Income

$5,399 $6,132 $6,633

Goodwill Amortization

295 295 295

Cash Taxes (1,738) (1,957) (2,131)

Total $3,956 $4,470 $4,797

Invested CapitalLoans and notes payable

Current portion of long-term debt

Long-term debt

Deferred taxes

Total equity line

Accumulated losses

Accumulated goodwill amortization

(Marketable securities)

Total Invested Capital

Return on Invested Capital (ROIC)

•One method to determine whether growth is profitable.

•Ratio of NOPAT to total operating capital.

•Performance measure that indicates how much NOPAT is generated by each dollar of operating capital.

•If ROIC is greater than the rate of return investors require, which is WACC, then the firm is adding value.

2001 2002 2003

23.5 26.04 27.7

Economic Value Added (EVA)

2001 2002 2003

$2,612 $3,020 $3,254

Net Operating Profit after Taxes (NOPAT)

2001 2002 2003

Operating Income

$2988 $3,386 $3,788

Goodwill Amortization

236 295 295

Cash Taxes (1,142) (1,245) (1,504)

Total $2,082 $2,436 $2,579

Return on Invested Capital (ROIC)

•One method to determine whether growth is profitable.

•Ratio of NOPAT to total operating capital.

•Performance measure that indicates how much NOPAT is generated by each dollar of operating capital.

•If ROIC is greater than the rate of return investors require, which is WACC, then the firm is adding value.

2001 2002 2003

13.11 13.29 14.72

Economic Value Added (EVA)

2001 2002 2003

$811 $969 $1,177

Questions??

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